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Stop the “havoc and confusion:” Industry petitions to overturn ban on broker fees

Real Estate Board of New York files Article 78 petition

REBNY President James Whelan (Credit: iStock; Whelan photo by Anuja Shakya)
REBNY President James Whelan (Credit: iStock; Whelan photo by Anuja Shakya)

Early Monday morning, attorneys for the real estate industry boarded a train to Albany to file a fiery petition seeking to overturn state guidance that they say has wreaked “havoc and confusion” on agents and renters.

The Article 78 proceeding — filed by the Real Estate Board of New York, New York Association of Realtors and 12 brokerage firms — called the Department of State’s guidance an “unlawful, erroneous, and arbitrary” interpretation of New York’s rent law passed in June. The guidance, circulated Feb. 4, forces landlords instead of renters to pay rental commission fees in certain instances.

“It is clear here the DOS has usurped the role of the Legislature and that its actions constitute an illegal exercise of legislative power,” the lawsuit said. “Clearly, if the Legislature had intended [the laws] to apply to agents of the landlord, or even more explicitly real estate brokers, it would have inserted those words into the statute.”

In their Feb. 10 petition, several major New York brokerages decried the “immediate and devastating impact” of the guidance and predicted thousands of agents could lose their jobs or see a significant drop in income.

“The recent memorandum from the New York Department of State … threatens both the future of Corcoran, as well as the livelihood of our over 2,400 agents,” wrote Corcoran Group COO Gary Malin in an affidavit. “Even more, it fundamentally misunderstands how the rental market in New York City has operated for decades.”

In making their case for a temporary restraining order, lawyers for the industry emphasized that thousands of current or pending deals are hanging in the balance.

“The unwinding of these pending transactions … will harm landlords (who face the prospect of losing substantial rental income they have reasonably expected to receive),” the petition said. It would also harm brokers who sourced deals “and most of all consumers, who may not then close on apartments they seek to rent, and have been misled by the DOS’s erroneous and arbitrary interpretation and improper rulemaking.”

In its affidavit, Bond New York claimed “thousands” of rental deals that were underway are in jeopardy because potential tenants are refusing to pay broker fees. The protests to paying commissions come “despite the fact that they were fully aware of the terms of the rental, and Bond is clearly the procuring cause of the transaction,” noted Douglas Wagner, the firm’s brokerage services manager.

Landlords could be left holding the bag, argued Hal Gavzie, Douglas Elliman’s executive manager of leasing.

“Landlords need these transactions, which had been fully agreed to by the tenant, or they will face the prospects of losing another month’s rent, at least,” he said in his affidavit. Smaller landlords in particular will feel the effects acutely, industry sources say.

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In the long term, the industry argued, tenants will be hit with rent increases as landlords seek to cover broker fees or the cost of marketing units themselves.

Corcoran’s Malin said in court documents that the “devastating and irreparable” impact of the guidance could not be overstated. In his affidavit, he noted that Corcoran also has thousands of deals “in which potential tenants are now threatening not to close the transactions,” or are refusing to pay agent commissions.

Both scenarios make it more likely “that renters will be priced out of many apartments,” Malin said in his affidavit. “Either result will mean increased rents for consumers all across New York City.”

The brokerages petitioning alongside REBNY and NYSAR include Corcoran, Elliman, Bond, Halstead, Brown Harris Stevens, Sotheby’s International Realty, Bohemia Realty Group, R New York, Kian Realty NYC, Level Group, City Connections and Regina Wierbowski Real Estate.

Compass, one of the largest firms in the city based on The Real Deal’s 2019 brokerage ranking, was notably absent. Its New York regional president, Rory Golod, criticized the guidance last week on PIX11, calling it a negative for consumers and brokers.

In a statement, Golod said Compass is “supportive” of efforts to change last week’s guidance, but said the firm hadn’t joined the industry’s petition because “we want to make sure that the best interests of those consumers and agents are represented.”

In the suit, lawyers for the industry tried to capture the shock felt by brokers who said they were blindsided by the state’s guidance last week and the immediate reaction of landlords and tenants alike that they would likely forgo using brokers.

“Businesses have been rocked by havoc and confusion,” the suit said.

Write to E.B. Solomont at eb@therealdeal.com and Erin Hudson at ekh@therealdeal.com

Read more of our coverage on New Yorku2019s broker fee upheaval

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